It's Not That Big a Deal

The Value of Inferior Products

There’s no shortage of lessons for us to learn from the unfolding Mylan scandal. It’s practically a study in the consequences of an uncompetitive market and bureaucratic cynicism. Among all the take-aways from this episode, there’s one thing that stands out as particularly interesting: the value inferior products offer consumers.

That sounds a bit counterintuitive. We typically think of inferiorities as something to be eliminated. But in many cases the presence of inferior goods–economically defined as goods for which demand increases when a consumer’s income drops–is actually beneficial, relative to their absence.

Before I talk about how this applies to the EpiPen, I have a confession to make:

I don’t have the latest iPhone.

I don’t even have the oldest iPhone. I have a Samsung Galaxy Light.

It overheats easily, has abysmal battery life, and sends snapchats that look like flipbooks. It hangs up during calls and will never catch a single Pokémon. I once tried to purge my text archive and it took over 12 hours.

Why do I own a device that’s so pathetic by modern standards? It’s a question of personal priorities and resources. I don’t care enough about the add-ons to spend $400 on a phone: a decision surely influenced by the fact that I don’t make that much money.

And yet, even though my phone is undeniably of poorer quality than the phones of my peers, I am much better for it. If I were to disappear tomorrow, say, because someone outlawed suboptimal cell phones, I’d be upset. I would probably end up buying an iPhone, but if I didn’t have the money, I might end up without a cell phone altogether.

So what’s the scrappy alternative (the Galaxy Light, if you will) to the EpiPen? Well, we don’t know–it’s not allowed to exist.

The FDA has the power of deciding what products consumers can and can’t access. In the case of EpiPen substitutes, as well as others, it’s imposed onerous hurdles to market entry that have severely limited anyone’s ability to compete with Mylan. The Wall Street Journal writes:

But no company has been able to do so to the FDA’s satisfaction. Last year Sanofi withdrew an EpiPen rival called Auvi-Q that was introduced in 2013, after merely 26 cases in which the device malfunctioned and delivered an inaccurate dose. Though the recall was voluntary and the FDA process is not transparent, such extraordinary actions are never done without agency involvement. This suggests a regulatory motive other than patient safety.

Then in February the FDA rejected Teva’s generic EpiPen application. In June the FDA required a San Diego-based company called Adamis to expand patient trials and reliability studies for still another auto-injector rival.

Let’s be charitable and ignore that Mylan spent over $2 million lobbying in Washington in 2015. FDA risk aversion, noble or otherwise, is still hurting consumers by leaving them with fewer options and higher prices.

While the FDA has a preference (and every political incentive) for extreme vetting, it may be that some consumers of epinephrine prefer a less expensive, if less tested, model of injector.

Assuming that consumers have the same priorities as their legislators is a mistake of arrogance, and a costly one. A study by Tufts University in 2014 put the cost of getting a drug through to market at $2.56 billion–$1.4 in out-of-pocket expenses and $1.16 in time costs (the forgone ROI of that $1.4 billion over the time the approval process took).

There are reasons people buy lower-quality products. Sometimes it’s a question of personal priorities, sometimes one of finance. The reluctance to acknowledge that this is as true in healthcare as any other marketplace is wrongheaded, though understandable given human emotion and that people’s health is at stake.

But the rules governing price and availability aren’t swayed by emotion. If we want EpiPens to be less expensive, we need to let more people try to make them, even if that involves some measure of risk. Excessive caution carries risk as well: by implementing such harsh standards, the FDA has ensured that the only product remaining is not only highly effective, but also highly expensive.

Rather than accept that there exists a continuum of quality in healthcare products, as with everything, epinephrine users are forced by regulation to use the best or nothing. Because of the diffuse nature of healthcare expenses, this kind of action raises prices across the board and inhibits the development of more efficient products.

Cell phones, even smartphones, are ubiquitous today and generally affordable. When they first came out, they were strictly the province of the wealthy. The same goes for cars, HD televisions, and most other technology.

Someone like me can afford those things today because lots of different producers were able to compete against each other and figure out how to give people more for less. If, when the iPhone came out, all following smartphones were to be held to the same standards, it’s almost certain that there would have been less people making smartphones, fewer models to choose from, and that the ones that did exist would be markedly more expensive and less innovative, due to reduced competition.

Yes, it makes sense to worry about the quality of medical devices that people are using, and yes, the FDA (or something like it) can be useful in that regard. But it also makes sense to concern ourselves with the availability of those same devices. Climbing healthcare costs are dangerous, too.